Wednesday, 9 February 2011

TSX - London Stock Exchange Merger Effect on Investors

TMX group (TSX: X), operators of the Toronto Stock Exchange, have agreed to merge with the London Stock Exchange (LSX: LDNFX.PK), subject to the Canadian federal government, along with Ontario and Quebec being willing (... funny how there seems to no UK government worry about it according to the UK press e.g. BBC, UK Reuters).

So how might this interest or affect individual investors?

1) TMX as an investment - We can buy shares in the TMX, which has been doing rather well (latest Q4 results here). Will the combination do better? The merger press release talks of synergies and cost savings, as they always do, but many corporate mergers do not succeed (Deloitte says it's about half). Key issues: Will the business cultures fit? Will the technologies fit (what is the essence of a securities market if not a computer and communication/network system)? The old IT joke applies - "God could not have created the world in seven days if He had had an installed base." Blogger Larry Macdonald took a look at TMX Group last November. Wonder if he bought in and made money. The Google stock chart for TMX looks enviously enticing.

2) Inter-listings - If the combination results in there being more companies listed in Canada on the TSX as the press release suggests then that will be good for investors in Canada. Securities sold in Canada can be held in all those registered plans the federal government has created. There is no cost-effective way at the moment for Canadians to buy foreign securities to be held in registered accounts (you have to do this through an agent on the phone and pay commissions that can easily amount to hundreds of dollars), apart from US-traded securities which we can buy cheaply online. The markets in the UK and Canada will of course continue to operate separately, not as one giant market, due to the fact that the companies must comply with the local regulatory requirements, which for the TSX is Ontario/Ontario Securities Commission. Whether a company will choose to go through all the initial and on-going extra cost of registering and complying with the different local regulatory requirements is debatable.

3) Market liquidity - More investors create more trading volume and decrease bid-ask spreads aka investor costs as well as making it easier to buy/sell shares. But will more investors, presumably from outside Canada, show up in the TSX after the merger? That's not obvious.

4) Trading fee effects - If the combined LSE-TSX lower their costs and in turn lower the charges they make on trading for brokers or on listing for companies, that may increase the trading volumes and liquidity, as well as number of companies listing, both to the benefit of us individual investors. The TSX, LSE and all public exchanges are increasingly are increasingly in competition with one another and with alternative exchanges and private deal making networks (e.g. project Alpha described in Canadian Business Online by Jeff Sanford). More competition equals better outcomes for investors.

5) Investor protection - It cannot get worse than it is now for Canadian investors due to the weak laws and enforcement in Canada. To the extent that existing TSX companies decide to Inter-list and become subject to the UK's FSA regulation that will be a benefit.

From the viewpoint of the Canadian citizen, as expressed through our governments, I cannot see why exactly it would matter that, as the Globe and Mail's Boyd Erdman article (linked at the top) puts it "some key levers of control would shift outside Canada". As he also notes, many other national stock markets have already merged or been bought out, including Italy's Borsa Italiana by the LSE. If anything, a stronger, better capital market would be a more likely result for Canadian companies and investment in Canada. The government should probably encourage the merger instead of blocking it.

In short, it's hard to see any downsides for the individual investor, unless I've missed something, and there are some possible upsides. Thumbs up.

Update 15 Feb: best article I've seen on the Canadian regulatory issues being raised - here on Westlaw. Not a single word that any concerns exist in the UK. It's all about Canada. Those xenophobes who fear foreigners, especially Arab foreigners, taking over, may find comfort, or extra fear, from this December Telegraph article on the mistrust and machinations amongst LSE shareholders in Abu Dhabi, Dubai and Qatar. Another excellent Telegraph article puts the proposed merger in a global context.


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CanadianInvestor said...

Hi Emily. Thanks for the offer but I write all my own posts.

larry macdonald said...

Thanks for the mention. Yes, I own TMX shares and have been wondering what to do in light of the proposed merger. I was afraid the deal would be killed by the government but your post gives grounds for optimism. Thanks for the analysis.

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